Just what is Arbitrage Investment?

In the simplest of terms, Arbitrage means to exploit price differential.

Usually it meant looking at differing sources of an investment, and if there was a price difference between Source A and Source B - then the investor / dealer / broker / manager would buy from the lower priced source, and sell on the higher priced source.

Example:- The price of Stock ABC was $20 per share on Exchange XYZ The price of the same Stock ABC on another Exchange 123 - was $15

The dealer would buy the stock from Exchange 123 for $15 - then sell on Exchange XYZ for $20 - making $5 per share profit (minus costs).

Typically the price differential was very small - and trading had to be extremely quick and liquid - otherwise the markets could go against you in a very short time.

Ten years ago Arbitrage was more commonplace than it is today - for a number of reasons.

Nowadays, Arbitrage still exists, but either in limited formats and availability as direct arbitrage, or more commonly in Hedge Funds.

Hedge Funds can have Arbitrage as one of their investment methodologies / strategies - and you will find that many of the past Arbitrage Managers have switched across to Hedge Funds.

Even after the LTCM (Long Term Capital Management) scandal / fiasco a few years ago - Hedge Funds continue to grow, and today are the biggest and fastest growing investment style in the World.

This doesn't mean that Arbitrage is dead - as it can be part of Hedge Funds. There are still some direct / explicit Arbitrage Funds available in the World.

Most of these concentrate on M&A Arbitrage (Mergers and Acquisitions) - or more usually Mergers.

The manager will actively seek companies which have been targeted as potentials for takeover, and buy into that company, in the hope the M&A activity will drive up the price.

This method is often enhanced by the use of leveraging (gearing up / borrowing) (remember LTCM?) - and sometimes using Derivative Structures such as Options - or hedging methods such as selling short.

Depending on the structure, methodology, management style, leveraging etc., the potential rewards can be substantial, but so can the risks.

Not all Arbitrage investments are the same - just like any other asset class, I would strongly suggest that anyone considering this should perform their own Due Diligence and seek professional advice.

One very common place where Arbitrage happens every day - by people just like you and me..... is eBay!

Sellers are locating items for sale from sources which may sell them very cheaply (flee-markets, garage sales etc.) and then selling them online for a tidy little profit.

These people are exploiting the price differential - arbitrage - and there's nothing wrong with that!!

It's all about 'Supply and Demand' - but that's another story!

(the information contained herein is for information purposes only and should NOT be considered as advice or recommendation relating to the purchase or sale of any investment).

An article by Gary Durkin
Founder of the Internet Advice Center®
http://www.InternetAdviceCenter.com

Gary has more than a decade of offline international business success behind him - each day controlling millions of dollars of investments world-wide, and has been doing business online for 6 years.

© Copyright 2005 - All Rights Reserved worldwide.

You are free to distribute this article, providing it remains unchanged and with the resource / bio box attached.

In The News:


pen paper and inkwell


cat break through


Risk and Reward

If you are doing your own investing in the stock... Read More

Stocks: Reduce Risk Yet Maximize Profits

It is important to note that every smart investor wants... Read More

Focus Your Investments on the Long Term

"All human power is a compound of time and patience!"... Read More

Your Worst Enemy To Successful Investing - The Media

How do you make your investment decisions and where do... Read More

Keep Stock Market Investment Profits

Have you had one of those huge investment winners ?... Read More

Retirement Plan Considerations Cheat Sheet for Small Business

RETIREMENT PLAN CONSIDERATIONS are something every small business person needs... Read More

The Convertible Craze Brightens The Future Of Equities

Convertibles are stealing the show with their safe investment image... Read More

Raising Capital Using a Public Company

Going public in this manner is ideal for companies that... Read More

Margin Benefits are Marginal at Best

Margin is one of those things that novices find puzzling... Read More

Consolidation Period

The economic data reported Fri showed continued above trend growth... Read More

Commodities - The Next Big Wave of Fortune Building

Have you often wished you could have got in on... Read More

Investing & Online Stock & Share Trading: Money & Risk Management - Atkinson Portfolio Planner (1)

This article was originally featured in Daryl Guppy's 'Tutorials in... Read More

Investing As A Sport?

I said last week that money doesn't generally buy happiness,... Read More

The Economy Is Not The Stock Market

Several days ago, the Commerce Department reported that May's factory... Read More

The Cost of Green Eggs and Ham

Young readers know that March 4th is the birthday of... Read More

Buy: Hold: Sell: Jump

I'm sitting here at my computer desk with a cup... Read More

Why Should I Use Penny Shares to Build Wealth?

A strategic question. Why indeed?1. A penny share would usually... Read More

Need To Trade!

You don't HAVE to be trading.As a novice trader, you'll... Read More

Use of a Franchise Business as a Family Tax Planning Strategy

Suggesting the use of a franchise business as a vehicle... Read More

Finding False Gold in Penny Stock

As far as traders go, many do not see the... Read More

Value Investing

By definition, value investing is the process of selecting stocks... Read More

Quit and Retire Three Years Earlier!

For most people, there is a direct correlation between how... Read More

Guru Focused: Robert Olstein?s Short Sells

While it is rather rare that value gurus sell stocks... Read More

Creating a Financial Future--Putting Your Plan Into Action Part 2

Real Estate can be a useful tool for investing. The... Read More

Forex market offers opportunity and information

The forex market is what is called an international exchange... Read More

Brain Snappers and Other Wall Street Nonsense

The last time you spoke with your broker did he... Read More

Effective Advice For A New Generation of Investors

CATCHING A FALLING KNIFEOne of the most common mistakes made... Read More

Financial Planners

"Financial planners are like dentists: they may occasionally inflict pain,... Read More

Buying Florida Investment Properties and Where Its Hot

Relaxing in Style: Florida Investment PropertiesIn Florida, relaxing in the... Read More

Investing and Asset Allocation

Sometimes you spend sleepless nights worrying about which stocks to... Read More

Justify Social Security ... Dont Save for Retirement

It is a common question when investors review their retirement... Read More

Waiting 20 Years Can Cost You Millions - Dont Wait Start Today

Many Young people live for Today. They really don't fully... Read More

Makin The Sauce

Let's face it, you're on a roll. After getting down... Read More